Why Home Equity Loans Are Still So Hard To Get
Homeowners looking for a home equity line of credit, which is a revolving line of credit secured by a mortgage, might have a hard time finding them these days. Several large banks suspended the granting of these loans last year due to the pandemic and the resulting economic uncertainty.
But despite a job market recovery, a robust housing market and a record amount of available home equity – $ 7.3 trillion through the end of the fourth quarter of 2020, the highest amount ever registered, according to mortgage data and technology company Black Knight – several banks have not resumed creating Helocs.
Wells Fargo has put the creation of new Helocs on hold after April 2020 and has not determined when it could resume offering the product, according to company spokesperson Tom Goyda. “Throughout the Covid pandemic, Wells Fargo has continued to provide mortgages to customers looking to buy a home or reduce their monthly payments through refinancing,” Goyda said in an email. “As the pandemic unfolded last year, Wells Fargo made a few changes that we believe have best served our customers’ interests in the long term and addressed health and safety concerns, credit and market risks and prudent balance sheet management. “
These changes included the suspension of the Heloc origins. And, while Wells Fargo has since waived most of the underwriting limits it put in place and resumed origination of cash refinances, the Helocs are still on hold, Goyda said.
Wells Fargo has joined JPMorgan Chase & Co., which temporarily suspended applications for new Helocs in April 2020. Chase, who declined to comment, says on his website that due to the economic uncertainty created by Covid, he does not temporarily accept applications for new home – equity lines of credit to protect both the consumer and the bank. The Citibank website contains similar language regarding the suspension of Heloc applications after March 3, 2021, due to “current market conditions”.
But while other lenders have cut back on their Heloc programs, Bank of America Corp.
continued to lend, but with stricter credit standards. These standards have since been relaxed.
We were also informed of the lessons of the financial crisis, where equity quickly eroded.
“Last April, at the onset of the pandemic, we saw increased unemployment, decreased consumer confidence and concerns about the stability of the housing market, and there was fear of a severe recession and extended, ”said Ann Thompson, Retail Sales Manager, West. , consumer loans for Bank of America. “We were also informed of the lessons of the financial crisis, where equity quickly eroded and some clients defaulted on their debts in second place.”
Since a Heloc is usually a second mortgage on a house, in the event of foreclosure, the holder of a second mortgage is not paid unless there is sufficient equity in the property after the repayment of the first mortgage.
Bank of America initially mitigated its risk by enforcing stricter credit standards, increasing applicants’ FICO scores, and lowering the maximum debt ratio. He also stopped lending to borrowers who were not existing bank customers. “We felt comfortable lending to our own clients with the reduced guidelines,” Ms. Thompson said. “As the maximum loan amount and maximum loan amount were also reduced, we felt that the loans to our own customers were responsible.”
In the first quarter of 2021, due to the improved economic outlook and vaccine rollout, the bank began reducing these requirements to pre-pandemic levels, making it easier for borrowers to meet its standards and to qualify for a Heloc.
“There is pent-up demand for Helocs,” Ms. Thompson said. “This is an opportunity for the client that we want within our guidelines.”
Mortgage industry experts are speculating on why banks could have left the Heloc market last year. “There were concerns about the risk, but also operational challenges because some of the big banks saw huge waves of refinancing demand last year,” said Mike Fratantoni, chief economist at Mortgage Bankers. Association. “Some of them have moved staff who previously worked in the home equity industry to work on refinances.”
Mr Fratantoni said there were also capital reserve and liquidity requirements that have encouraged banks to focus on other products, such as cash refinances, and borrowers are turning away from Helocs. “The psychology of homeowners has changed a bit,” he says. “Clients seem a little more hesitant to tap into their home equity. That is why we expect very modest growth for Helocs. “
Industry experts expect the Big Three national banks to start offering Helocs again, but the product will be rolled out with care. “I would expect lenders to slowly start making Helocs, but only where they are already number one,” said Tendayi Kapfidze, chief economist at LendingTree. “Then if someone defaults, the risk of loss is pretty low.”
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